Policy panel on “Monetary policy in a fragmented global economy"

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Norges Bank

Speech

Policy panel on “Monetary policy in a fragmented global economy"

Remarks by Governor Ida Wolden Bache at the 25 BIS Annual Conference in Basel, Switzerland on 26 June 2026. The remarks were given as part of a panel discussion on the topic "Monetary policy in a fragmented global economy".

The conference speeches and remarks were published by BIS on 19 October 2026 as a BIS Paper 176 "Central banks and macro-financial stability in a fragmented global economy（https://www.bis.org/publications/paper-176-central-banks-and-macro-financial-stability-fragmented-global-economy）" .

Let me begin by thanking the BIS for the invitation to participate in this panel. I am very pleased to be here and to take part in this discussion.

I will make three main points.

First, as many others have noted, geoeconomic fragmentation and other structural changes could mean that we will see larger and more frequent shocks going forward. In such an environment, monetary policy needs to respond decisively to shocks to prevent persistent deviations from target and keep inflation expectations well anchored.

Second, while the importance of well anchored inflation expectations is widely recognised, we still need to understand them better – how expectations are formed, how they influence behaviour and when they should worry us.

Third, even if shocks become larger and more frequent, their macroeconomic impact may change over time. For example, the effect of energy shocks on activity appears to have declined in many economies. This underscores the importance of a more granular understanding of how different supply shocks – such as energy shocks – transmit through the economy.

Let me turn to my first point. Shocks may arise from geopolitical tensions, trade restrictions or disruptions in energy markets. But other forces are also at work. Climate change, the transition to a low-carbon economy and artificial intelligence may all reshape economies in the years ahead – yet the speed and scale of these changes remain highly uncertain.

Greater macroeconomic volatility does not in itself call for a different monetary policy reaction function. But while simple policy rules are often linear, the costs of deviations from our objectives are not. Larger shocks may therefore require a stronger policy response than such rules would suggest.

Similarly, in a situation where inflation has been above target for some time, further increases may warrant a more forceful policy response than when inflation is close to target.

However, if higher inflation reflects an adverse supply shock, the central bank must balance the need to bring inflation back to target against the risk of unnecessarily weakening activity and employment. The trade-off becomes even more challenging if unemployment is already high – or has been high for some time.

Another complication is that shocks are rarely neatly separable. They often reflect a combination of supply and demand forces. Even with hindsight, the relative roles of these forces in the post-pandemic inflation episode remain contested. Moreover, with shocks likely to become more frequent, distinguishing between the different shocks affecting the economy is unlikely to become any easier. The key task, however, remains to ensure that inflation expectations are well anchored.

That brings me to the role of inflation expectations, and to my second point: we need to understand inflation expectations better. People in this room have helped us make real progress, but further work is needed. We need to improve our understanding of how expectations are formed, how strongly they affect price and wage-setting, which movements we should pay attention to – and which ones we may safely look through – and, ultimately, whose expectations matter most.